TMI Blog2017 (2) TMI 633X X X X Extracts X X X X X X X X Extracts X X X X ..... n the form of data centre, infrastructure, connectivity and application technology by the assessee to SCB for SCB’s banking operations. Thus, we are of the opinion that the payment made by SCB to assessee-company does not fall within the realm of “royalty” and hence cannot be taxed in India as royalty u/s 9(1)(vi) of the Act. The payment made by SCB to assessee-company does not fall within the realm of ‘fees for technical services’ as contained in Sec. 9(1)(vii), albeit the assessee has only provided a standard facility for data processing without any human intervention. Accordingly, we hold that the said payment is not taxable in India as ‘fees for technical services’ in terms of Sec. 9(1)(vii) of the Act. Thus, the issue raised in ground no. 1.1 is decided in favour of the assessee. With regard to rate of tax u/s 115A however this issue will become purely academic because we have already held that the amount of payment received by assessee from SCB is not taxable in India. Credit of tax paid we direct the Assessing Officer to look into this issue and allow credit of tax paid as per the directions given by Tribunal in the stay petition. Chargeability of interest u/s 23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 1961 ('the Act'). In doing so, the learned AO and the DRP disregarded the Contract for Provision of Computing Services entered into between the Appellant and Standard Chartered Bank, India ( SCB India ) for the services rendered by the Appellant to SCB India. The Appellant humbly prays that the aforesaid receipts should not be taxed in India and the learned AO be directed accordingly. 1.2 Without prejudice to above Ground No. 1.1, the Learned AO and the DRP erred in denying the benefit of the rate prescribed under section 115A of the Act. In doing so, the learned AO and the DRP held that SCB India being a non-resident company does not fall within the ambit of the term 'Indian concern' as per the provisions of section 115A of the Act and accordingly, the provisions of section 115A of the Act do not apply to the payments made by SCB India. The Appellant humbly prays that the Learned AO be directed to apply the rate as prescribed under section 115A of the Act. 1.3 Without prejudice to Ground Nos. 1.1 to 1.2, on the facts and in the circumstances of the case and in law, while calculating the tax liability of the Appellant, the lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 68 countries during the years under consideration. Considering the involvement of 68 countries, the Cocteau agreement which is typical of any other outsourcing contract contained detailed framework for providing adequate safeguards to SCB and the requisite services to be performed by the assessee at certain standards so as to meet the outsourcing objectives of SCB. He also pointed out that the Reserve Bank of India vide letter dated 5.10.2004 has approved the processing of data pertaining to Indian operations in Hong Kong by the assessee. As per the aforesaid contract with SCB India, the consideration payable to the assessee for rendering the data processing services have been computed having regard to the following:- (i) The overall service provision is processing of data furnished by SCB India into stipulated information form and category. In order to provide the data centre processing services with the desired quality / service level as required under the Cocteau Agreement , the assessee (Atos) has the following responsibilities (in respect of the facility / system, which is located in Hong Kong):- ensure adequate facility, systems and software which are located in H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India using the software provided by SCB India, which has not been designed by the assessee. A copy of the data is backed-up and stored in the Hong Kong data centre for recovery purposes. The assessee has no right to access and to use the processed data of SCB India. 5. The ld. Counsel further pointed out that prior to the Assessment Year 2006-07, similar activity was carried out by the assessee s sister concern based in Singapore, i.e. Atos Origin IT Services Singapore Pvt. Ltd . In the case of said Atos Singapore, the matter relating to Royalty and Fees for technical services (FTS) for rendering a similar nature of services was decided in favour of the assessee, though under Article 12(3) of India-Singapore DTAA. However, in the said judgment the Tribunal has discussed the entire issue threadbare as to how the provision for data processing cannot be reckoned as royalty or FTS. 6. Ld. Counsel further pointed out that in the first round of proceedings, the Assessing Officer following his predecessor s order in the case of Atos Singapore held that payment made by SCB India to Atos Hong Kong (assessee) is in the nature of royalty u/s 9(1)(vi) of the Act. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Explanation 2 to Section 9(1)(vii) of the Act. In doing so, the Assessing Officer mainly relied on the Schedule 24 to the Cocteau agreement at pages 1036 to 1065 of the Cocteau agreement and held that the assessee is required to submit report for various activities and services performed. Some of them relate to various technical and managerial services such as: (a) Database administration; (b) Capacity management; (c) Inventory management; (d) Performance management; (e) Business impact analysis; (j) Disaster recovery planning and testing; (g) Problem analysis and resolution; (h) Change implementation; (i) Risk reporting; (j) Operating system installation and maintenance; (k) Systems software and utility installation and maintenance (l) Software distribution; (m) Virus updates and management; (n) Operational acceptance testing; (o) Governance; (p) Service level report; (q) Change management; (r) Cocteau library; (s) Finance reports (MIPS utilization covering disc capacity used, MIPS utilization for each mainframe), Midrange usage (covering CPU usage for each midrange with cost of service by application, storage usage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edule 1 of the Cocteau agreement are as under: (a) To provide the SCB Group with a global reaching, flexible, scalable and technologically innovative approach to delivering data centre and related computing services; (b) To achieve substantially improving data centre services capability, operational risk and on an ongoing basis continuous service excellence and improvement consistently across the SCB Group; (c) To recalibrate and sustain an ongoing basis, SCB's data centre services cost with the outsourcing market by means of transparent cost management so as to demonstrate excellent value for money and cost effectiveness; (d) By leveraging the capabilities and technology thought leadership of the supplier companies. Position technology in the SCB Group to sudden business growth and changes; (e) To have an effective governance model to achieve these outsourcing objectives and ensure observance and performance of the Contract; (j) Access a broader and deeper range of technology skills; (g) Align the technology strategy of the SCB Group with the overall business strategy of the SCB Group; and (h) Keep the technology of the SCB Group up-to-date with bes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm, about human resources, about level of understanding, the process that they might adopt to conduct their work, internal process which would be adopted while conducting the assignment or the technology which they will use. The client and their consultant may also mutually discuss the role, responsibilities, obligation, technology to be used and everything may be put in writing for better understanding. However, this does not mean that any kind of knowledge or rendering of technical services is being given. Similarly, by way of Cocteau agreement, SCB made sure what is required to be done, when, how, by whom, etc. at the assessee s end and same should be clear in writing for better understanding. He submitted that considering the involvement of 68 countries during the year under consideration and each country having 100 s of branches, it was necessary that the Cocteau agreement contained detailed framework providing adequate safeguards to SCB and the assessee. These safeguards are availability of adequate data centres, disaster recovery facility, storage facility, network connectivity. These safeguards are also justified by the amount of work involved, the number of countries invo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gy, rather it has used such technology and infrastructure on its own, to render services to the SCB Group and the Assessing Officer/ DRP erred in considering that the assessee has made available to SCB the use of its equipment, model, design, invention and process. 12. Lastly, with regard to Assessing Officer s objection that fixed charges and variable charges made for provision of facilities, infrastructure, network, system, software and environment for main framework, etc. are in the nature of royalty, the ld. Counsel drew our attention to Schedule 5 of Cocteau agreement dealing with charges , wherein it has been clearly mentioned that break-up of charges for main framework services and midrange services is merely a methodology for determining the charges. The methodology of payment cannot change the characteristic of the income. 13. Coming to the Assessing Officer s contention that the impugned payment is in the nature of royalty mainly on two counts; firstly, use of process, model, design, invention and; secondly, use of equipment, the ld. Counsel gave written submissions, which for the sake of ready reference is reproduced hereinbelow :- (i) Why there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluded transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret;'. As can be seen, the Explanation has been inserted to extend the meaning of 'Royalty' by providing the explanation of the term 'process' to also include transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. This Explanation has been inserted specifically for the categories of Satellite and Transponder facilities . Since, the assessee s case is not falling under such category, Explanation 6 is not applicable to it. (ii) Why there is no use of equipment? a. Clause (iva) of Explanation 2 to Section 9(1)(vi) applies only to income from the leasing of industrial, commercial or scientific equipment: As can be seen from the wordings of Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Act, it deals with the use or right to use any industrial, commercial or scientific equipment (b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the decision of Yahoo India P, Ltd. Vs DCIT (140 TTJ 195)(Mum) which has observed as under: 5. .......... A perusal of the relevant portion of the Board circular shows that the legislative intention behind insertion of the said clause is to overcome the situation where no tax at source was being deducted from the payment of lease rent of industrial, commercial and scientific equipment by taking shelter under the erstwhile definition of the term royalty as given in the IT Act, 1961. The legislative intention to insert cl. (iva) of Explanation 2 to s. 9(1)(vi) in the statute thus is to cover the lease rent of industrial, commercial and scientific equipments in the definition of royalty and the said definition has been widened to that extent only. In the assessee s case there is no hiring of equipment by it. On the other hand the assessee itself utilises the equipment / environment to provide standard facility. In light of the above discussion, it is submitted that Clause (iva) will have no application on the assessee s case at any point of time as there is no lease of equipment. b. Non-applicability of Explanation 5 and Clause (iva) of Explanation 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overview of the Managed Platforms and Managed Infrastructure in Datacentres in respect of which the Appellant shall provide the services. Managed Platform means a unit of hardware or firmware (together with any embedded software) providing a specific functionality, which is located within a Datacentre for the time being. Managed Infrastructure means, (i) the managed network; (ii) Managed components that provide interconnectivity between managed platforms (e.g. cable trays, patch panels and other passive LAN components); (iii) managed components that provide a suitable operating environment for the managed platforms (e.g. power, racking, air conditioning, fire protection devices and physical security devises); (iv) managed components that support the Applicant's operation and / or provision of services (e.g. telephones, foxes, shredders), located in a datacentres. Thus, using the above components and infrastructures, the assessee shall provide the data centre and related computing services to the SCB group. (b) Batch and Online Operations : The assessee shall provide high quality day-to-day computer operations for both batch and online workloads on all m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (f) Database Administration : This section describes the Services to be provided by the Supplier in relation to the management of tall databases forming part of the Managed Systems from time to time. The primary objective of the database administration is to ensure continuous, uninterrupted and efficient database operation. This section describes the Appellant's responsibilities to ensure continuous uninterrupted and efficient database operation. The Appellant is required to prepare and maintain an efficient database for continuous and uninterrupted database operation. The entire functioning of the database is computerized. The assessee s staff is merely required to oversee the functioning of the database and take corrective measure in the event of any interruption. (g) Capacity Management : The primary purpose of capacity management is to analyse current and historical performance information in relation to the Managed Systems, business events and configuration of the Managed Systems and prepare recommendations ensuring that adequate computing resources are available to handle the workload projected for production Managed Systems and systems under developme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilities in analyzing the impact in the event of failure of any hardware or software. (l) Disaster Recovery Planning and Testing : This section describes the assessee s responsibilities for planning and testing in advance, the disaster recovery. (m) Problem Analysis and Resolution : This section describes the assessee s responsibilities in technically diagnosing the problem which is affecting the managed systems, identification of such problems and implantation of resolutions. (n) Change implementation : Change implementation describes the implementation of Change into the Managed Environments. The Change Management Process is intended to provide sufficient control in relation to the implementation of a Change such that associated risks are minimized during planning and implementation, including from a logical security standpoint. This section lays down the procedure for implementing any change in the data centre activities and to minimise the effect of such change. (o) Hubs and Switches : Responsibilities of the Supplier shall include provisioning of fault tolerant, reliable and resilient LAN environment (encompassing hubs and switches) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto such an agreement. The main object of the Cocteau agreement was provision of data computing services by the assessee to SCB. It was only looking to the amount of work and the number of countries involved that the Cocteau agreement was made in such detail so that both parties have defined obligations, roles and responsibilities so that their respective interests are protected. He again referred to the approval letter of RBI, wherein RBI has clearly required SCB India to observe the following terms and conditions:- (i) All original records, source documents and all books of accounts will be maintained in India. Hard copies of books of accounts and processed outputs must also be maintained in India. Indian office should have full and effective control over the critical process of debit / credit of the accounts; (ii) All bank office functions, including treasury functions, are performed in India. Only processing of data can be done overseas. Processed output should be received in India on a day to day basis; (iii) The bank will remain responsible for maintaining the secrecy and confidentiality of the data processed/ to be processed; (iv) The bank must maintai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the process of generation of reports which is the main objective of Cocteau agreement. This is done automatically. The Human intervention, as stated above, is required only for maintaining, repairing and monitoring the hardware and softwares which are processing the raw data of SCB. It was also pointed by drawing the Hon'ble Tribunal's attention to page no 66 para 2.3.1 of the Agreement that even the faults were to be corrected automatically. During the course of the hearing, the assessee had submitted the photographs of its data centre which clearly showed that the no human finds place in such centres. The human intervention is required only for maintenance of such data centres and managing such data centres in the event of any failure. The assessee further submits that number of transactions transmitted by the SCB India to the assessee are in such large numbers that would be impossible for any number of human to apply their minds and generate reports. This can also be understood with the help of an example: Countries in which SCB has presence 68 (Actual) Cities in which SCB has branches ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d CIT (DR) had argued that for observing the process, preparing the report, issuance of certificate and for monitoring of machines, human involvement is definitely there, therefore, it cannot be held that there is no human intervention. In our opinion, this cannot be the criteria for understanding the term technical services as contemplated in Explanation 2 to section 9 (1)(vii). If any person delivers any technical skills or services or make available any such services through aid of any machine, equipment or any kind of technology, then such a rendering of services can be inferred as technical services . In such a situation there is a constant human endeavour and the involvement of the human interface. On the contrary, if any technology or machine developed by human and put to operation automatically, wherein it operates without any much of human interface or intervention, then usage of such technology cannot per se be held as rendering of technical services by human skills. It is obvious that in such a situation some human involvement could be there but it is not a constant endeavour of the human in the process. Merely because certificates have been provided by the humans a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ambit of the expression technical services appearing in Explanation 2 of Section 9(1)(vii) of the Act. In the absence of the above distinguishing feature, service, though rendered, would be mere in the nature of a facility offered or available which would not be covered by the aforesaid provision of the Act. In reply to the DR's argument and his reliance on the Apex Court judgement, it was submitted that the same para as relied upon by the Ld. DR supports the case of the assessee. It was submitted that with the help of the same infrastructure the assessee also provides services to others. In this connection, the Hon'ble Tribunal's attention was drawn to the use of client services by the assessee and stated in Point 4.3.14. Further, the fact that the assessee is already engaged in rendering data processing services, is further substantiated by the introductory paragraph of Cocteau agreement wherein it has been stated that the supplier companies have represented that they are specialists in the provision of computing services to the banking industry . In light of the fact that similar services are being rendered to the other entities as well as the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vi) or fees for technical services . Since the assessee-company is incorporated in Hong Kong and is providing services/facilities for processing data to SCB from Hong Kong, therefore, the payment made by SCB India to assessee has to be seen from the perspective of domestic law, i.e. Income-tax Act and not under any treaty. The assessee-company is mainly engaged in the business of providing services/facilities for data processing through computer hardware and software to banking entities. It had entered into an agreement which has been termed as Cocteau agreement with SCB for provision of data processing support, which is for 68 countries with various branches. Under the said Cocteau agreement , the role and responsibilities of assessee in respect of providing data processing services has already been discussed in detail in the earlier part of the order including the manner in which the entire processing activity is carried out. The Revenue s case is that first of all, it is in the nature of royalty and for coming to this conclusion, the main contention of Assessing Officer is that, firstly, the assessee is not merely providing data processing services, but also providing tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e proper performance of the hardware and operating systems, ensure adequate technical support of operating systems, to ensure system performance, maintain adequate security measures and effective internal control environment and also put in place appropriate disaster recovery plan. All these are to be maintained by the assessee to conduct the processing of data through computers. There is no providing or giving any use or right to use of any process to SCB. The technology, infrastructure, data centre, connectivity, etc. is solely used by the assessee for its own purposes and not to make available any such thing to SCB as explained by the ld. Counsel. At the first stage, SCB transmits raw data through operating software owned by it to the hardware facility of assessee in Hong Kong. The assessee in Hong Kong mainly receives the data so transmitted and at this stage there is absolutely no use or right to use of any process of assessee in Hong Kong by SCB. At the second stage, the raw data transmitted by SCB is processed by the assessee in its computer system/hardware as per the requirement of SCB and at times may be using the application software owned by SCB. At this stage also, SCB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 also applies to the said clause as this clause never existed as on April 1, 1976 and accordingly, the legislation cannot clarify the intention of the clause which never existed on the said date. Hence Explanation 5 6 would not be applicable in the case of assessee. 20. Further, for any payment to fall within the term of royalty it is sine qua non that there should be some kind of a transfer of any right in respect of various items as given in Explanation 2 or any imparting of any information or use of any patent, invention, model, design, secret formula, process, etc. Here, in this case, there is neither transfer of any of right in respect of any patent, invention, model, design, secret formula or process or trademark or any similar property by the assessee to SCB, nor there is any imparting of any information or use of any of similar nature of things. Here, the entire equipment and technology which are used for processing the data is solely for performing the activity of assessee for itself while rendering data processing services to SCB. There is absolutely no transfer of any technology, information, knowhow or any of the terms used in Explanation 2 or any kind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as placed on the decision of ITAT, Mumbai Bench in the case of Siemens Limited (supra) , wherein the Tribunal has emphasised upon the element of human intervention for rendering of technical services. The relevant observation in this regard reads as under:- ------------------------In our opinion, this cannot be the criteria for understanding the term technical services as contemplated in Explanation 2 to section 9 (1)(vii). If any person delivers any technical skills or services or make available any such services through aid of any machine, equipment or any kind of technology, then such a rendering of services can be inferred as technical services . In such a situation there is a constant human endeavour and the involvement of the human interface. On the contrary, if any technology or machine developed by human and put to operation automatically, wherein it operates without any much of human interface or intervention, then usage of such technology cannot per se be held as rendering of technical services by human skills. It is obvious that in such a situation some human involvement could be there but it is not a constant endeavour of the human in the process. Merely beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pinion that the payment made by SCB to assessee-company does not fall within the realm of fees for technical services as contained in Sec. 9(1)(vii), albeit the assessee has only provided a standard facility for data processing without any human intervention. Accordingly, we hold that the said payment is not taxable in India as fees for technical services in terms of Sec. 9(1)(vii) of the Act. Thus, the issue raised in ground no. 1.1 is decided in favour of the assessee. 22. So far as the issue raised in ground no. 1.2 with regard to rate of tax u/s 115A of the Act, it has been submitted that the Assessing Officer has taken 40% of the gross amount on the ground that SCB India has no role in Cocteau agreement . The ld. Counsel pointed out that the rate applicable should be reckoned from the cut-off date of the agreement, which for the purpose of Sec. 115A of the Act is before 1.6.2005 then it is 20% and if agreement is post 1.6.2005 then it is 10%. Even, though we agree with the ld. Counsel, however this issue will become purely academic because we have already held that the amount of payment received by assessee from SCB is not taxable in India. Likewise, the issue raised ..... X X X X Extracts X X X X X X X X Extracts X X X X
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